Compliance Blog

Posted by Anthony Demangone

Recently, NCUA issued Letter to Credit Union 10-0756 (September 22, 2010) to address the permissibility of offering free coin counting services.  The letter addressed a question from a credit union that wanted to offer free coin sorting services to non-profits.  NCUA said it could do so, as discussed in the letter.  But don't get too excited.  You have to read the letter closely.  You may think it gives a green light to the offering of free coin counting services to all non-members. That is not the case.   

First, it is very important to read the first paragraph of legal opinion letters.  This is where NCUA limits the scope of its letter and lays out its findings.  Here's the first paragraph from that letter.

You asked if it is permissible for your federal credit union (FCU) to offer free use of its coin sorter machine to non-member non-profit organizations as a marketing activity to promote membership in the FCU. Yes, as described below, the FCU may provide this free service to non-member non-profit organizations under its incidental powers authority. The FCU may also provide the service as a charitable activity to these organizations.

As you can see, NCUA's letter responded to a question from a credit union regarding non-members who are non-profits. Given that is the case, NCUA holds the following:

1. The credit union could offer the free coin sorting service to these non-profit non-members under its incidental powers authority of "marketing."
2. In addition, the credit union could offer free services to these members as a charitable activity, under NCUA's charitable donations rule.  

Charitable donations.  Federal credit unions have the ability to make charitable donations to certain entities under NCUA's charitable donations rule.  The power is limited, but it does extend to non-profits that do business or are located in the credit union's business area.  The charitable donations power is an interesting angle, but it won't necessarily open up your ability to offer free coin sorting services to most of the non-member consumers in your community.  

Incidental powers.  Here's the text regarding this part of NCUA's analysis.

NCUA’s incidental powers rule authorizes an FCU to engage in certain activities incidental to its business. Marketing activities designed to attract or retain members or encourage use of FCU products and services are among the activities preapproved as an incidental power. 12 C.F.R. §721.3(h). Your described purpose in offering the coin sorting service is consistent with a marketing activity. We note, however, the marketing program should not become a substitute for membership.

Now, even though this letter answers a question regarding non-profits, this paragraph does appear to give guidance that would apply to all non-members.  The theory is this: Under your incidental power of marketing, you offer free coin sorting services to attract people to your branches, bags of change in hand.  But note the last sentence from that paragraph of guidance.  The marketing program should not become a substitute for membership.  Unfortunately, NCUA does not discuss that issue any further.

When does a free service provided under the incidental power of marketing become a substitute for membership?  An older legal opinion may help - NCUA Letter to Credit Union 02-0250.  That letter addressed a question from a credit union that wanted to offer wire services to non-members.  NCUA also mentioned the incidental power of marketing, but they gave a good deal more guidance, noting that the free services must be limited in scope and timing.

Our opinion is that, in the situation you have described of an FCU with a segment of its field of membership comprised of individuals with a special need for wire transfer services and a reluctance to join the FCU, providing wire transfers on a limited basis would be a permissible marketing activity.  The purposes of providing limited wire transfers would be to promote membership and familiarize the users of the service with the benefits of membership.  These purposes are directly consistent with the recognized purposes of marketing activities as stated in the regulation.

The limitations, which would be established by the FCU, should be narrowly drawn and clearly designed to ensure that the marketing program does not become a substitute for membership or result in providing wire transfers on an unlimited or continuous basis.  Appropriate limitations might include placing restrictions on the number of times an individual uses the service, or on the period of time for which the individual uses the service, before joining the credit union.  It should be clear that providing the service is used as an opportunity to promote and encourage membership.  While it is not feasible or appropriate to delineate precise conditions in this letter, it should be clear from all of the circumstances, and from results over time, that the purpose of the program is to bring the individuals into the FCU’s membership.

Providing wire transfers on a limited basis as a marketing activity does not establish a continuing customer relationship between the FCU and the individual.  It is distinguished, in that respect, from establishing a share account or providing a loan, and in our opinion it does not violate field of membership limitations and it does not conflict with the statutory restriction against providing wire transfers as an ongoing or continuous service to nonmembers.

So, according to the 2002 guidance, a free service to a non-member offered under the incidental power of marketing is not a substitute for membership if it is "narrowly drawn" with appropriate limits.  

Conclusion: If your credit union wants to offer free coin counting services to non-members under the incidental powers of marketing, it would be wise to incorporate guidance from both the 2002 and 2010 letters referenced in this blog posting.